Sunday, January 25, 2009

4Q GDP expected to be horrible

This coming Friday, we will see the US GDP number come out for the fourth quarter of 2008. The expected number is -5.1% annualized. That is pretty horrible.

Based upon a GDP of $14.4 Trillion that means we are looking at a loss of about $185 Billion in lost GDP for the fourth quarter alone. Since countries can only increase their GDP in two ways: increasing the number of workers or increasing the productivity of the workers, we are facing a serious productivity and employement situation.

Theoretically, if you increase the number of people on the job while keeping productivity the same, then you should have an increase in GDP. Likewise, increasing the productivity of workers while keeping the number of workers the same also increases GDP. In all cases, it is always a little of both. More workers and increasing productivity means more GDP.

Right now, it is pretty obvious what is happening. People are being laid off (less workers) and those that are still employed are producing less (lower productivity).

Normally, we could blame all this on consumer demand. But this time it is different. Over the past year or so, credit has tightened. As a result, projects and investments have been put off. Since people could not borrow the money to say, build a new office building, then that translates into lower GDP.

Way back in October, we saw then Treasury Secretary Henry Paulson make the case for the TARP (Toxic Asset Recovery Program). The idea made sense, buy up the bad assets held by banks and get the banks back in the business of lending. The original plan did not happen because of a problem with pricing the assets. So instead, the banks were given money in exchange for stock warrants. Thus partially nationalizing the banks.

Today, we have a new administration. I call on them to get back to the original TARP idea which is to take the bad assets off the books of the banks. If this is done, then the good loans can be pulled out and the bad loans can be renegotiated.